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Production Function
The Production Function specifies the maximum amount of output a firm can produce with a given quantity of inputs and a given state of technology.
Law of Diminishing Returns
If one input is varied while others are held constant, the additional output from successive units of the variable input will eventually decrease.
Short Run
The short run is a period in which only variable inputs, such as labor and materials, can be adjusted, while fixed inputs remain unchanged.
Long Run
The long run is a period in which all inputs, including fixed factors such as capital, can be adjusted, making all costs variable.
Total Cost (TC)
Total Cost represents the total expenditure required to produce a given level of output, including both fixed and variable costs.
Fixed Costs (FC)
Fixed Costs are costs that do not depend on the level of output and must be paid even if no production occurs.
Variable Costs (VC)
Variable Costs are costs that change with the level of output produced.
Marginal Cost (MC)
Marginal Cost is the additional cost incurred to produce one more unit of output.
Average Cost (AC)
AC= TC/Q Where: TC = Total Cost Q = Quantity produced
Average Fixed Cost (AFC)
AFC= FC/Q Where: FC = Fixed Costs Q = Quantity produced
Average Variable Cost (AVC)
AVC= VC/Q Where: VC = Variable Costs Q = Quantity produced
Perfect Competition
A market structure in which many firms sell a homogeneous product, have no influence on price, and can freely enter or exit the market.
Profit Maximization in Perfect Competition
When Marginal Cost equals Market Price: MC=P=MR
Long-run Equilibrium Condition in Perfect Competition
MR=P=MC=minAC In the long run, firms in perfect competition earn zero economic profit.
Imperfect Competition
A market structure in which individual firms have some control over the price of their output.
Monopoly
A monopoly exists when a single firm is the sole producer of a product with no close substitutes and entry is blocked.
Cartel
A group of producers that forms an agreement on production and pricing to restrict competition.
Monopoly
A market structure where a single firm is the sole producer of a product with no close substitutes, and entry into the industry is blocked.
Monopolistic Competition
A market structure where many firms sell similar but not identical products, and entry into the market is relatively easy.
Oligopoly
A market dominated by a few large firms that produce either homogeneous or differentiated products and are interdependent in their pricing and output decisions.
Cartel
A group of producers that forms an agreement to control production and pricing to limit competition.
Marginal Product curve
The Marginal Product curve shows the additional output produced when one more unit of input is added, holding other inputs constant.
Fixed Cost graph
The Fixed Cost graph is a horizontal line showing that fixed costs remain constant regardless of the level of output.
Variable Cost graph
The Variable Cost graph shows that variable costs increase as output increases.
Total Cost (TC) graph
The Total Cost graph is the sum of fixed and variable costs and increases with output.
Marginal Cost (MC) graph
The Marginal Cost graph shows the cost of producing an additional unit, typically U-shaped due to the Law of Diminishing Returns.
Average Cost (AC) graph
The Average Cost graph shows the cost per unit of output and is typically U-shaped due to economies and diseconomies of scale.
Average Fixed Cost (AFC) graph
The AFC graph slopes downward as output increases since fixed costs are spread over more units.
Average Variable Cost (AVC) graph
The AVC graph is typically U-shaped, decreasing at first due to increasing returns and then rising due to diminishing returns.
Relationship between Marginal Cost (MC) and Marginal Product (MP)
MC and MP have an inverse relationship. As Marginal Product increases, Marginal Cost decreases, and vice versa.
Relationship between Marginal Cost (MC) and Total Cost (TC)
The Marginal Cost curve represents the slope of the Total Cost curve, meaning MC is the change in TC for each additional unit produced.
Relationship between Marginal Cost (MC) and Variable Cost (VC)
The Marginal Cost curve represents the slope of the Variable Cost curve since fixed costs do not change with output.
Relationship between Marginal Cost (MC) and Average Cost (AC)
When MC is below AC, AC is decreasing. When MC is above AC, AC is increasing. MC intersects AC at its minimum point.
Relationship between Marginal Cost (MC) and Average Variable Cost (AVC)
When MC is below AVC, AVC decreases. When MC is above AVC, AVC increases. MC intersects AVC at its minimum point.
Long-Run Cost curve
The Long-Run Cost curve shows the lowest possible cost at which a firm can produce any level of output when all inputs are variable.
Demand Curve in Perfect Competition
It is a horizontal line at the market price because firms are price takers.
Demand Curve in Imperfect Competition
It is downward-sloping, meaning firms can set their own prices but face lower demand at higher prices.
Profit-Maximizing Condition for a Monopoly
MR=MC A monopolist maximizes profit where Marginal Revenue equals Marginal Cost.
Short Run for a Monopoly
A monopoly may make profits or losses depending on whether Price is greater or less than Average Total Cost.
Long Run for a Monopoly
If entry remains blocked, the monopoly can continue making economic profits.
Short Run for Monopolistic Competition
Firms may earn economic profits or incur losses, depending on price and cost conditions.
Long Run for Monopolistic Competition
Firms earn zero economic profit due to free entry and exit, similar to perfect competition but with differentiated products.
